Bitcoin skepticism by bankers from China to U.S. hinders growth

Bitcoin, the digital money created as an alternative to currencies controlled by nations and banks, is finding that its wider adoption depends on both as governments in China and the U.S. demand enthusiasts play by existing rules.

Bitcoin exchanges, payment processors and other startups say they need banks to connect them to the existing payments system and provide basic services like checking accounts. To do that, the fledgling companies must convince the regulators who police the banks that Bitcoins aren’t being used to conceal illicit activity.

“Banks are scared to deal with Bitcoin companies, even if they really want to,” said Stephen Pair, co-founder and chief technical officer of BitPay Inc., an Atlanta-based company that processes payments for merchants in Bitcoin. Pair said BitPay has relationships with banks in the U.S., Canada and Europe; he declined to name them at the banks’ request.

Regulators show little sign of losing interest in tracking financial flows, be they in dollars, renminbi or Bitcoin. China’s central bank today barred financial institutions from buying and selling the virtual currency and from pricing products in Bitcoin, sending prices tumbling more than 10%, according to the CoinDesk Bitcoin Price Index, which synthesizes prices across major global exchanges where Bitcoins can be traded for traditional currency. Its value stood at $1,041.65 at 2 p.m. Eastern time.

Prices jumped last month when a Department of Justice official described the currency as “a legal means of exchange.” Still, another regulator at the same event warned that Bitcoin-related businesses would need to meet current money-laundering standards before banks would agree to work with them.

Accounts Shuttered

Regulators have pressured banks to close some Bitcoin- related accounts. Tradehill Inc., a San Francisco-based exchange, shut down in August after its bank, Internet Archive Federal Credit Union, dumped Bitcoin-related clients for what it called “regulatory issues.” U.S. officials also shut down an account at Wells Fargo & Co. used by Mt. Gox, a Japan-based exchange, to service U.S. customers.

Introduced in 2008 by a programmer or group of programmers under the name Satoshi Nakamoto, Bitcoin is the most prominent of a group of virtual currencies -- money that exists mainly as a string of code -- that have no central issuing authority. Today, despite its unclear status, Bitcoin can be used to pay for t-shirts, food or an appointment with a Manhattan psychiatrist.